Question

Smith Accounting Services is considering a special order that is received from one of its corporate clients. The special order calls for Smith to prepare the individual tax returns of the corporation's four largest shareholders. The company has idle capacity that could be used to complete the special order. The following data have been gathered about the preparation of individual tax returns: S60 Materials cost per page Average hourly labor rate Standard hours per return Standard pages per return Variable overhead cost per page S.50 Fixed overhead cost per page $.50 Smith Accounting Services would be satisfied with a $40 gross profit per return. Determine the minimum bid price for the entire order (1 point)

Answer 1

Material cost = Material cost per page x Standard pages per return x Number of returns

= 1 x 10 x 4

= $40

Labor cost = Standard hours per return x Average hourly labor rate x Number of returns

= 4 x 60 x 4

= $960

Variable overhead cost = Variable overhead cost per page x Standard pages per return x Number of returns

= 0.50 x 10 x 4

= $20

Since the company has idle capacity, fixed overhead cost will not increase due to the acceptance of the special order.

Material cost	40
Labor cost	960
Variable overhead cost	20
Total cost	1,020
Gross profit	160
Minimum bid price	$1,180

Minimum bid price for the entire order = $1,180

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